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Can Lucent avoid a take-over?

It seems absurd to speculate that mighty Lucent Technologies might come under the hammer, but that is precisely where rumours say it is now.

It seems absurd to speculate that mighty Lucent Technologies might come under the hammer, but that is precisely where rumours say it is now.

The question Lucent Technologies executives will be asking today is: what does it have to do now to prevent a take-over? Last week, rumours began to circulate that Nokia was eyeing Lucent up as a potential acquisition—a situation which would have been absurd twelve months ago, but which today might make perfect sense.

A year ago, Lucent Technologies had a market capitalisation—a figure arrived at by multiplying the number of shares in issue with the price of one of those shares—of about US$280 billion.

At that price, Lucent was the giant and the one rumoured to be on the prowl for infrastructure acquisitions of its own. However, after a year in which the company has posted four earnings misses, has botched product roll-outs, and fired its CEO, take-over rumours began to circulate.

Lucent had lost 76% of its value from its 52-week high, reducing its market value to about $62 billion.

Then, yesterday happened. As if things weren’t bad enough, Lucent announced the fourth of those missed earnings reports, and the mighty giant saw its market capitalisation tumble to $47.3 billion—where it will stand when the market opens today.

Lucent Chairman and CEO Henry Schacht said in a conference call that while the company is basically sound, it has "serious focus and execution problems" which will take all of fiscal 2001 to sort out.

Lucent said it expects a first-quarter loss of 25-to-30 cents a share from continuing operations, much worse than Wall Street's forecasts for a loss of 1 cent a share.

Schacht said too much focus on short-term revenue rather than long-term value creation hurt the company, and agreed with recent analyst comments that the company arrived late in the optical networking game.

While $47.3 billion is a large sum of money, it's within the range of a dominant, successful telecom equipment company such as Nokia, and the talk was that Nokia was interested long before this bargain price tag came about.

Lucent has a substantial amount of engineering talent, a broad product array, and its business segments are worth more than the company's current market capitalisation, analysts told cnnfn.com this week.

Lucent could be a good merger partner for a telecommunications equipment maker looking for a strong foothold in North America, a geography that provides around 70% of Lucent’s revenue. And within the wireless infrastructure market, for example. Nokia is typically a GSM specialist, whereas Lucent is a significant maker of CDMA- and TDMA-based wireless infrastructure equipment in the North American market. Combine the two, and you would get the largest wireless infrastructure provider in the world, surpassing Ericsson.

A twist in the tale, reminiscent of the 3Com/Palm spin-off, in which the newly-formed company was worth many times the value of the company that spawned it, markets in the United States are keeping an eye on the looming spin-off from Lucent of Agere Systems.

Agere when it becomes independent will have about 16,500 people world wide, and a market capitalisation of an estimated $45 billion after an initial public offering. In other words, in the order of 97% of the parent company's current market value is represented by the potential value of a publicly traded Agere.

"An acquirer could purchase the entire Lucent and recover a substantial portion of the payment through a sale of [Agere]," said Merrill Lynch analyst Michael Ching.

One reason Lucent has decided to spin off Agere is that Lucent's competitors are reluctant to purchase components from one of Lucent's divisions, says cnnfn.com.

In the mean time, Lucent says it will seek to cut $1 billion in costs with a restructuring plan focusing on high-growth areas. That means job cuts amongst other things, though Lucent didn’t speculate on how many of its 153,000 people would be looking for work in the new year.

More details of the plan or any charge Lucent will incur will be released when the company reports official first-quarter results in late January.

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